Trusts are tools. They are useful for many different purposes and have a rich history. In fact, Georgia was originally settled as a Trust. The charter signed by King George on April 21, 1732, “created a corporate body called a Trust and provided for an unspecified number of Trustees who would govern the colony from England.”[1] This history demonstrates that trusts are powerful when used properly.
One focus here is exploring the intersection of trust law and public benefits law. To put that discussion in context, initially basic trust concepts are discussed, focusing on Georgia trust law.[2] The discussion then moves to Medicaid and Supplemental Security Income (SSI) eligibility rules, at least to the extent they impact trust structure and administration.
Generally speaking, a trust divides the legal and equitable interests in property. See Understanding Trusts – Keeping it EZ. A trust exists when one person (a trustee) holds legal title to property, but has a duty to use trust property for the benefit of someone else (a beneficiary).[3] This definition of a trust is somewhat limited since modern trust law allows a beneficiary to serve as his or her own trustee;[4] it is still a useful starting point. But since the rights a public benefits applicant has to access and control property often impacts eligibility, we will must begin here to discuss how Medicaid treats trusts, including special needs trusts.[5] To do so, we refer to other materials (e.g., statutes, regulations, general counsel opinions).[6] In American jurisprudence (our common law system), precedent informs us regarding how future controversies will be resolved by looking to see how they were resolved in the past.
To distinguish basic trust law from Medicaid’s treatment of trusts, we refer to the “Medicaid Trust Rules.” The phrase “Medicaid Trusts Rules” also describes the Medicaid and SSI eligibility rules applicable to trusts.[7] Usually, when we describe the Medicaid Trust Rules, we are referring to rules applicable to self-settled (first party) trusts. A self-settled trusts is one created by the applicant (or the applicant’s spouse) or funded with the applicant’s own assets (or the spouse’s assets). Although third party trusts may count toward benefits eligibility, when they negatively impact eligibility, it is usually due to poor planning or poor drafting.[8] Under the Medicaid Trust Rules, self-settled trusts may count toward eligibility even when control and access over the trust is virtually nonexistent.
Since Medicaid Planning is not the only purpose for using a trust, we also refer to the Grantor Trust rules. The phrase “Grantor Trust” usually indicates how a trust is taxed (or not taxed). The Grantor Trust rules appear in Sections 671 through 679 of the Internal Revenue Code of 1986, as amended (the “IRC”).[9] Sections 671 through 679, which address income tax treatment (and Sections 2036 through 2038, which address estate and gift taxation) cause certain trusts to be disregarded for tax purposes. Trusts that come within the Grantor Trust rules are taxed to the person who established the trust(the Grantor), or to the Grantor’s estate. Because taxes impact many transactions, the term Grantor Trust has also become common short hand in the non-tax context for describing a trust created with a settlor’s assets.
Notes:
1. Trustee Georgia, 1732-1752, The New Georgia Encyclopedia, http://www.georgiaencyclopedia.org/nge/Article.jsp?id=h-816. See also M. Radford, Georgia Trusts & Trustees, § 1.4, n.3 (West 2011-2012 Ed.)
2. To some extent, we chart an unwieldy course by undertaking a discussion of trust law. “[T]rust law is an amalgamation of state constitutional law, state and federal statutory law, common law, uniform laws and scholarly opinions.” M. Radford, Georgia Trusts & Trustees, § 1.2 (West 2011-2012 Ed.). It’s origins stretch into Roman, Germanic and Islamic law. Radford, Georgia Trusts & Trustees, § 1.3.
3. See M. Radford, Redfearn: Wills and Administration in Georgia, Seventh Ed., Vol. 1 (Thomson/West 2008), at § 14:3. The following definition appeared in Georgia’s 1991 Trust Act and, while not carried forward in the Revised Georgia Trust Code of 2010, still appears in Redfearn as descriptive of trusts: “A trust is defined by the Georgia Code as a fiduciary relationship with respect to property arising from a settlor’s intention to impose equitable duties on a person [the trustee] to hold, manage, or otherwise administer that property for the benefit of another person [the beneficiary].” The Restatement defines the term “trust” as a “fiduciary relationship with respect to property, subjecting the person by whom the title is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it.” Restatement (Second) of Trusts, § 2. Similar definitions appear in the Social Security Administration’s Program Operations Manual System (POMS). See POMS SI 01120.199.E.1; POMS SI 01120.200.A.1. This focus on active duties is consistent with English law as it developed following passage of the Statute of Uses in 1535. The Statute of Uses collapsed passive trusts, placing legal and equitable title in the beneficiary, while the Chancery took the position that active trusts, where the trustee had duties, were not affected. Radford, Georgia Trusts & Trustees, § 1.3. A letter dated September 3, 2007, from Adam R. Gaslowitz to Matt Patton, summarizing proposed changes, many of which ultimately became Georgia’s Revised Trust Code of 2010 is posted on the State Bar of Georgia’s website. Click here for a shorter summary prepared by Mary Radford, published in 2010.
4. “No trust shall be invalid or terminated and no merger of title to the trust property shall occur merely because the trustee or trustees are the same person or persons as the beneficiary or beneficiaries of the trust.” O.C.G.A. § 53-12-24. Absent this statutory rule, a Georgia d4A trust created by a guardian could be deemed revocable and, therefore, countable. POMS SI 01120.200.L.3. The POMS include regional guidance detailing how trusts are treated in the various States. Even if the trust interest is not merged, the protection afforded when the trustee and beneficiary are the same may be limited or nonexistent. See M. Merric, Discretionary Trust or a Support Trust: Whether a Distribution Should Be Made; Restatement (Second) of Trusts, § 156, Comment e. See also M. Radford, Georgia Trusts and Trustees, 2012-2013 Edition, § 1:6 (West) (settlor may also serve as trustee and as beneficiary, but there must be at least one trustee who is different from at least one beneficiary or the trust fails for want of a fiduciary duty).
5. The Revised Georgia Trust Code of 2010, referred to in this document as the Trust Code or the Revised Trust Code, was effective on July 1, 2010. It applies to any Georgia trust regardless of the date the trust was created except (1) to the extent it would impair vested rights and (2) as otherwise provided by law. O.C.G.A. § 53-12-1(b). It does not alter the common law except as provided. “For a fuller scope of [the Trust Code’s meaning], the Revised Trust Code directs us to the common law, including the Restatement of the law of trusts.” McPherson v. McPherson, 307 Ga. App. 548 (2011).
6. “In Georgia, as in all states, the trust law is an amalgamation of state constitutional law, state and federal statutory law, common law, uniform laws and scholarly opinions.” M. Radford, Georgia Trusts and Trustees, 2012-2013 Edition, § 1:2 (West).
7. The phase “Medicaid Trust” is also used to describe trusts used for SSI eligibility since the ultimate goal when using these trusts is attainment of Medicaid eligibility. In “SSI States” such as Georgia, an individual who is eligible for SSI is also eligible for Medicaid. SSI States have entered into an agreement with the Commissioner of Social Security under 42 U.S.C. § 1383c which allows the Commissioner to determine eligibility for medical assistance in the case of aged, blind or disabled individuals.
8. The Medicaid rules are designed to analyze an applicant’s resources to determine whether the applicant is “poor enough” under the rules to qualify for medical assistance. In limited cases, the deeming rules pull in assets which belong to others (e.g., a spouse or the parents of a minor child), but generally assets which belong to someone else are not analyzed. Therefore, if someone else is establishing a trust for a Medicaid applicant, a properly structured third party trust should be firewalled so the applicant does not receive enough control for the trust to be considered as part of the means testing process. Third party money only becomes relevant when it is given to an applicant, becoming the applicant’s property, or when the applicant has sufficient legal control over the money to use it for his or her support.
9. These are the income tax provisions. IRC Sections 2036 through 2038 indicate whether a trust is disregarded for estate and gift tax purposes.
